The Centrale Bank van Curaçao en Sint Maarten (CBCS) will tighten its monetary policy stance further by raising the pledging rate by 150 basis points to 3.50%. The pledging rate, that was last increased on June 7, 2022, is the rate at which the commercial banks can borrow at the CBCS in case of a liquidity shortage. The current increase of the pledging rate is consistent with a projected increase in interest rates on the international financial markets,
particularly the fed funds rate. Although still solid, gross official reserves and the import coverage are expected to further decrease this year. Therefore, the Monetary Policy Committee (MPC)1 of the CBCS will continue to monitor the economic and monetary developments in the monetary union closely and tighten the monetary policy stance further if warranted.Due to, among other things, supply chain disruptions caused by the war in Ukraine and the COVID-19 pandemic, global commodity prices have surged, causing a sharp increase in inflation around the world. Despite the higher inflation, real GDP will continue to grow across the monetary union in 2022. In both Curaçao and Sint Maarten, stay-over tourism increased significantly during the first half of the year, supporting the countries’ economic recovery. The real GDP expansion in the first half of the year is also reflected by an increase in private credit extension. “However, the growth outlook for both countries has been revised down since the outlook of June 2022 amid soaring prices and significant uncertainties that are tilted to the downside. Against this background, real GDP is projected to grow by 5.5% in Curaçao and 5.8% in Sint Maarten in 2022”, explains dr. José Jardim, executive director of the CBCS.
The soaring international commodity prices, both oil and non-oil, have resulted in a deterioration of the monetary union’s terms of trade. Consequently, the deficit on the current account of the balance of payments is projected to increase at a faster pace than initially projected. Also, gross official reserves are projected to drop at a faster pace. In the first 8 months of 2022, gross official reserves (excluding gold) dropped by NAf.283.5 million. This development can be ascribed to a higher import bill amid soaring international commodity prices and increased economic activity
in the monetary union. Furthermore, the rising interest rates on the international financial markets financial markets has increased the appetite of commercial banks and institutional investors to invest abroad seeking higher returns.
Due to a projected increase in imports combined with the decline in gross official reserves, the import coverage dropped from 5.9 months at the end of 2021 to 5.4 months at the end of July. “It is currently expected that the import coverage will reach approximately 5.0 months at the end of the year, still well-above the norm of 3 months”, dr. Jardim adds. Meanwhile, the liquidity of the commercial banks has shown a decreasing trend since February 2022 due primarily to lower dollar deposits of the commercial banks at the Bank.
So far this year, the U.S. Federal Reserve (Fed) has increased its federal funds rate four times in an effort to contain inflation. In the last adjustment in July 2022, the Fed raised its target rate by 75 basis points to 2.25% – 2.50%. It is the first time since 1994 that the Fed has raised its policy rate so rapidly in a short period of time. It is expected that the fed funds rate will increase further this year. Because of the peg of the NAf. to the US dollar, the interest rates in the international money market affect the interest rates in the money market of the monetary union of Curaçao and Sint Maarten.
An increase of the federal funds rate affects immediately the international money market rates.
“Against this background, the CBCS has decided to increase the pledging rate further with 150 basis points to 3.50%, effective September 5, 2022, the second increase this year. In addition, the CBCS will focus on the extension of the average maturity of the outstanding balance of certificatesof deposit (CDs) through offering longer maturities (i.e., 12, 26 and 52 weeks) again on the bi-weekly auctions of CDs. Both NAf and US dollar CDs will be issued for these maturities to broaden local investment opportunities for the commercial banks to maintain a solid foreign exchange
position”, dr. Jardim stated.
Jardim finally explained that the risks to the economic outlook for the monetary union remain tilted to the downside. The main risks are a further increase in commodity prices, a recession in the monetary union’s main trading partners, and tighter financial conditions. In addition, similar to the previous outlook, new COVID-19 outbreaks and the implementation of fiscal austerity measures without room for public investments could pose a threat to the pace of economic recovery in both Curaçao and Sint Maarten. Also, for Curaçao specifically, the current imbalance
on the labor market remains a downside risk while a resumption of activities at the refinery could support a faster than expected economic recovery. In the case of Sint Maarten, delays in reconstruction activities and possible natural disasters may slow down economic growth.
